Charter Communications: Another Bidder?

It's a down day for media stocks, but Charter Communications is one of the few names in the green. The shares sumitted above $400 for the first time, rising as much as 4.9% earlier today. Here's why

By

Johanna Bennett

Aug. 9, 2017 11:16 a.m. ET

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Charter Communications (CHTR) is one of the only media stock in the S&P 500 index that is rising in today’s market action.

At just over $398 a share, the stock is up almost 2.2% in recent market action after earlier rising as much as 4.9% -- ascending above $400 a share for the first time -- to a new all-time high of $408.83.

Illustration:
Photo: Peter Newcomb/Bloomberg News

Why? It looks like there is yet another player with ambitions to buy Charter. According to CNBC, the French telecom giant and its U.S. cable subsidiary, Altice USA is reportedly weighing an offer.

The French telecom giant and its U.S. cable subsidiary, Altice USA, are working on an offer to buy Charter, but have not yet brought a purchase proposal to Charter or its advisors, according to people close to the situation. There's no guarantee that Altice will engage, though the prospects seem likely.

Altice and its founder Patrick Drahi have long had ambitions to expand in the U.S., and with SoftBank's recent interest in making an offer to buy Charter, Drahi has decided to see if he can compete.

Altice has bankers and lawyers working on a bid for Charter. But like SoftBank, it faces significant hurdles in crafting a deal that would meet shareholders' expectations on price while not being replete with the stock of the acquiring company, which in this case would be the far smaller Altice USA.

Media reports have pegged Japan’s Softbank as a possible bidder for Charter, though there are doubts whether Softbank or Altice can concoct an offer that will meet with the approval of Charter’s management or the company’s largest shareholder, Liberty Media (LMCA).

CNBC weighed in on that issue as well.

Both SoftBank and Altice are hobbled by a perceived inability to craft deals with a large amount of cash. Drahi and SoftBank's Masayoshi Son are men unafraid of taking on vast amounts of debt to fuel their ambitions, but it's not clear Charter management or John Malone, the chairman of Liberty, has interest in accepting a deal in which much of the value they give up is traded for stock in a new company, laden with debt and reliant on the cash flow of Charter to pay down that debt.

In its short time operating in the U.S. market, Altice has shown a unique ability to cut costs and generate substantially higher margins, before taxes and other costs, than predecessor managements. But Liberty is still wary of taking Altice paper in the belief that it is too early to tell whether those gains are sustainable. And while Malone typically likes to craft deals that are tax free in nature, Liberty's enormous gain on its Charter stake, which could approach $20 billion in a deal, might lead him to accept a larger cash component in the consideration.

Charter, with $60 billion in debt and an expected purchase price that could reach or exceed $500 a share would represent an enterprise value of almost $200 billion. While Altice operates at higher levels of leverage than Charter and would be expected to add two turns of leverage to the $16 billion in cash flow it receives from Charter in the deal, those additional borrowings would not be near enough to fund a large cash component.

One wild card for both SoftBank and Altice is whether either can bring in significant equity investments from outside parties to help fund their bids.

At a recent $396.46, Charter’s share price has gained more than 37% since the start of 2017. Last month, Barron’s argued that the cable giant still has over 50% upside, calling it “a monopolistic cash machine with quality management that remains undervalued.”

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